FiveStars Can Help Your Small Business Get Repeat Customers

Wednesday

Oct 10, 2012 at 10:00 AMOct 10, 2012 at 10:20 AM

By Peter S. Cohan WALL & MAIN

One of the fundamental principles of good business is that if you treat your customer well, they’ll keep coming back for more. And those loyal customers are much more profitable over the long run than if you have to keep bringing in new ones to replace the dissatisfied ones who fired you.

To understand why this is important, it helps to examine an example of a company that operates on the principles of customer disloyalty. For that, consider Groupon. It offers consumers discounts at, say, restaurants that result in flocks of consumers who flood the restaurant on a Saturday night.

The restaurant gets so many customers that the new and regular ones get terrible service. The restaurant takes on additional costs as it tries to cope, gets paid half the normal price, and loses money on the Groupon without turning those one-time visitors into long-term customers. One Portland, Ore. Coffee shop lost $8,000 on a Groupon, and called it the worst business decision that it had ever made.

According to the New York Times, Muddy’s Coffeehouse – it serves coffee and granola – had to take out a loan to cover its Groupon losses. Muddy’s gave Groupon customers $24 worth of food and coffee for $12. It paid Groupon half of its revenues, drew in crowds, lost money, and would have shut down were it not for that loan. As owner, Dyer Price, told the Times, “They don’t warn you that you’re going to get hit really hard and that you have to be prepared. We will never, ever do it again.”

Naturally, such merchants will fire Groupon and Groupon will need to pay sales people to go out and persuade new merchants to participate. For Groupon shareholders, this has been a disaster – the stock is down about 80 percent since its initial public offering because its costs for marketing keep going up as it struggles to grow while it loses merchant customers.

Doing the opposite of what Groupon does is the original idea behind loyalty cards. Such cards would give customers points for returning to buy from you and after the consumer had accumulated enough of them, she would get a valuable prize. And that good feeling would keep the customer coming back for more.

These days, people have so many different loyalty cards, that it’s hard for consumers and merchants to keep track of them all, said Victor Ho, president and CEO of Mountain View, Calif.-based FiveStars.

Before he started FiveStars in 2010, Mr. Ho was a McKinsey consultant — working with big name clients on the order of Macy’s and Starbucks whose names he can’t reveal – and his focus was on customer loyalty. He pointed out that the typical consumer has 18 rewards cards, and that’s too much of an information processing strain for small businesses to handle.

FiveStars was born of Mr. Ho’s knowledge of the market opportunity in loyalty cards born of personal frustration. Mr. Ho and his co-founder, a McKinsey colleague, learned from their work there that Fortune 500 companies spend millions of dollars on in-house loyalty programs because “a well-executed loyalty program is extremely profitable.”

Mr. Ho, who had then been living in New York City for two years, had many such loyalty cards. For example, he had collected “stamp cards” from all his favorite restaurants and many key chain cards on his key ring. His wallet was packed with these cards and he lost them frequently. He and his co-founder decided to develop a better way to manage loyalty cards.

In the fall of 2010, they pulled together a team, interviewed “over 100 business owners, figured out what they wanted, and started building a seamless solution.” The FiveStars universal loyalty card that launched in July 2011 lets consumers sign up in ”just a few seconds to use just one loyalty card everywhere they go and still earn store-specific rewards,” according to Mr. Ho.

And since it’s integrated with most merchants’ Point-of-Sale (POS) systems, FiveStars can analyze consumer behavior in ways that help local businesses create better online links — through email, text messaging and social media – to their consumers — boosting their engagement and revenues. Merchants pay FiveStars a “simple flat fee between $65 and $100 per month."

FiveStars has $16 million in funding — having raised a seed round in April 2011 and a $14 million Series A round in July 2012. And that money is being used to help FiveStars get a piece of a $60 billion market that’s growing at 12 percent in 2012 thanks to a growing emphasis by companies on customer retention.

And FiveStars has been growing fast, as measured by consumer purchases per month – the one activity measure that Ho was willing to reveal. He notes that in July 2011, FiveStars handled 100,000 such purchases and by August 2012, the comparable figure was 3.5 million — a whopping 1,374 percent compound annual growth rate. Ho says its monthly consumer purchases are now “doubling every three to four months.”

And FiveStars customers are loyal — only 2 percent of them leave. The reason is that FiveStars “drives thousands of customers a month” and its POS data – the service is “integrated with 90 percent of the POS systems out there,” according to Mr. Ho – lets it “provide accurate data to merchants on their customers’ spending behaviors as well as how many new customers the service brings these merchants when consumers refer members of their social networks to their business.”

FiveStars has 75 people, but it’s very picky about who it hires. The company interviewed 300 candidates to hire 18 sales representatives, and 200 engineering candidates from Carnegie Mellon University to bring 10 into the final round.

But those who make it could be around when FiveStars realizes Mr. Ho’s goal of making it a public company that becomes “the Visa of loyalty.”